Barry Schlesinger offers his thoughts on “double bottom line” investment funds in this real estate-focused roundtable discussion. Listening is moderator Deborah La Franchi.
In actuality, double bottom line funds have a triple bottom line, said moderator Deborah La Franchi of Strategic Development Funds. Such funds and investment vehicles accomplish three objectives: (1) the generation of market-rate returns for investors; (2) investment in low-income communities to satisfy a social mission; and (3) engagement in environmental and sustainable buildings and activities. However, the panelists stressed repeatedly that these are financially driven investments with secondary and tertiary benefits. This understanding has become increasingly important as the industry has matured and investors compare these returns to the rest of the real estate market. Several years ago, investors did not have same financial expectations.
La Franchi provided an overview of double bottom line funds. Across the industry, she said, $8 billion to $10 billion is currently invested in double bottom line funds. While this is a large number, it is only a fraction of the half a trillion dollars invested in private equity funds. The average size of double bottom line funds ranges from $50 million to $200 million of equity. The investor profile is typically an institutional investor, such as a bank.
Double-bottom line funds were initially created as commercial vehicles for investment banks to obtain Community Reinvestment Act (CRA) credits, said La Franchi. But the driving force has shifted as these investments now create social value without sacrificing on economic value. Today foundations are investing both to achieve mission and see market-rate returns. Similarly, pension funds, such as CalPERS, are increasing their portfolio allocations, and insurance companies are following suit.
All investors have similar priorities, with the first being the expectation for solid returns. The panelists concurred that these are not subsidized investments. The added benefits are job creation, retail service support and the creation of housing to revitalize communities so that further development happens.
The fund managers of double-bottom line funds consist of highly qualified teams of real estate experts who have the capacity to raise capital and work with third-party developers to assist them in redefining projects if need be by bringing them additional expertise to underwrite projects, evaluate contaminated sites, and structure and protect investments. This is not passively managed money; the fund managers are very active investors.
The terminology applied to these types of investments is another important aspect to understanding the industry, as terms range from "socially responsible investing" to "mission-related investing" to "double bottom line." Daniel Beaney of Shamrock Capital Advisors Inc noted that regardless of the terminology; such investments generate appropriate risk-adjust returns and stimulate economic development in low- or moderate-income areas. Shamrock does so by diversifying across property types and investment structures. Under the Genesis Fund, Shamrock initially raised $85 million in 1999 to invest in Los Angeles. Today the fund invests throughout Southern California and achieves mid-teen returns, net to the investors.
Similarly, Lee Winslett of Wells Fargo Bank's Community Investment Department commented that he is focused on the business proposition first and foremost, after which he looks at the second bottom line. Winslett classifies Wells Fargo as a place-based investor, wanting to put money in traditionally overlooked areas and hoping to create a competitive advantage by doing so. Winslett commented that "groups that we fund are probably stronger, as they signed up for a tougher mission and have to please two masters."
Barry Schlesinger of KW Fund Management Group is currently capitalizing three funds: Bay Area Smart Growth Fund, Northwest Louisianan and Puget Sound. To date, KW Fund Management Group has $1.25 billion in double-bottom line product, he said, and has achieved greater than 30 percent IRRs on average. The fund's strategy is to go into markets where it has significant presence and people on the ground. As a result, 75 percent of the deals are done on an off-market basis. The Northwest Louisiana fund is the first rural-focused fund in the country. Schlesinger says he saw a niche market that was underserved and the opportunity for above-average returns. To pursue a social mission as well, Schlesinger's Northwest Louisiana encourages participation from the local investment group by lowering the typical minimum investment requirement of $3 million to $50,000. Further, the fund is providing development experience, intellectual capital and sponsorship, in terms of national companies who will work with local companies to bring them up to a standard that they are not at now. This fund differs from the Puget Sound and Bay Area funds in that it is "more socially involved but it is still economically driven."
Daniel Beaney of Shamrock Capital Advisors Inc provided an additional example to illustrate the success of double bottom line funds; a $20 million investment in South Bay Pavilion in Carson, Calif. In addition to the economic returns, one of social benefits was the creation of 400 jobs, 80 percent of which were filled by Carson residents. The city is a major stakeholder in the project and provided subsidies to the partnership in order to attract tenants who otherwise wouldn,t want to be in this market.
Other projects in the immediate area are now attracting institutional investors as they now realize there is money to be made in this market. There are abundant metrics to evaluate the financial performance of such projects. For Beaney, his role is also to "quantify to the investor base that we are making a meaningful impact in providing jobs for low- to moderate-income people in low- to moderate-income communities"
Global Conference 2013
Former Prime Minister Tony Blair, philanthropist Bill Gates and Strive Masiyiwa of Econet Wireless discuss advancing prosperity in Africa.
